January 3, 2008 - Sean Dunn, Dublin Ireland

The developer Sean Dunne and his wife, Gayle Killilea, at home in Dublin.

It's 3 a.m. at Doheny & Nesbitt, a favorite watering hole of Dublin’s political and business elite, and the property tycoon Sean Dunne stoops to retrieve a penny from the pub’s grimy floor.

One would think that Mr. Dunne, Ireland’s best-known building developer, would be in bed at this hour. It’s a weeknight, after all, and he has meetings that begin before first light.

What’s more, the Irish economy, pummeled by the most severe housing bust in Europe, has collapsed. And the gossip around town is that Mr. Dunne, whose brazen deal-making and Donald Trump-like lifestyle epitomized the country’s euphoric boom, might be going bankrupt.

But, no matter, a penny is a penny.

“I am never, never too proud to pick a penny up from the floor,” Mr. Dunne said. He is on perhaps his fifth pint of Guinness, capping a rollicking night of Champagne cocktails, followed by a wine-soaked dinner — yet his thick brogue is clear of even the faintest slurring.

“I grew up with nothing and I know the value of money,” he adds. “The Celtic Tiger may be dead and if the banking crisis continues I could be considered insolvent. But the one thing that I have is my wife and children — that they can’t take away from me.”

It is not known whether Mr. Dunne will fall victim to today’s world financial catastrophe, but there is no doubt that his country has.

Everything, it seems, has grown worse here. The recession started earlier and its bite has been deeper. Housing prices have fallen by as much as 50 percent. Bank shares have plummeted by more than 90 percent. Unemployment is approaching 10 percent.

The roots of Ireland’s fall date to more than 20 years ago, when a clutch of economists, politicians and civil servants put their heads together in this very pub and planted the philosophical seeds for the Irish economic miracle.

Known widely as the “Doheny & Nesbitt School of Economics,” these beery musings soon became government policy that chopped taxes in half, sharply reduced import duties and embraced foreign investment — a radical transformation that gave birth to the Celtic Tiger and perhaps the most open and vibrant economy in Europe.

But beyond the glow of this sudden efflorescence that made Ireland the fourth most-affluent country in the Organization for Economic Cooperation and Development, a housing bubble had begun to form. Low interest rates, a wave of inward immigration and a bank lending spree drove housing’s share of the economy to 14 percent, the highest in Europe, from 5 percent.

Developers like Mr. Dunne became multimillionaires and — much like the hedge fund and private-equity elite in America — became visible public and cultural figures. They were living large in a country just coming to grips with its ability to show a little swagger.

Ireland’s policy makers, like their counterparts in the United States and Britain, were seduced by record tax inflows and a full-employment economy. They paid little heed to the lonely voices that warned of the crash that finally came over the summer, when interest rates in Europe began to rise. Banks that had steered more than 60 percent of their loans toward property stopped lending, and asset values plummeted.

“We have repeatedly warned that the government’s housing policy was extremely dangerous,” said John Fitz Gerald, an economist at the Economic and Social Research Institute, a leading policy center in Dublin, who has long urged that the government stanch housing demand by raising taxes. “You will now see unemployment going to 10 percent and we will experience a sharp drop in output.”

He shakes his head and sighs: “This was predictable, but the government just did not deal with it.”

By wide consensus here, two events have come to define — both culturally and financially — the sweep and excess of the Irish property boom. Both revolve around Sean Dunne.

In July 2005, Mr. Dunne paid 379 million euros for a seven-acre plot in the exclusive Ballsbridge neighborhood of Dublin and promptly announced that he would tear down the two luxury hotels on the site to build a high-end commercial and residential development.

That deal amounted to 54 million euros an acre, one of the highest amounts ever paid for land in Europe. His subsequent architectural plan featured a soaring Dubai-like office tower cut in the shape of a diamond that anchored a futuristic community of expensive houses and glamorous shops, and the price tag of one billion euros shocked Dubliners with its gall and ambition.

Hobbled by delays and vocal neighborhood opposition, the project sits before a local planning board that on Jan. 30 will either approve or scrap the plan.

The second moment occurred in 2004 when Mr. Dunne, who is now 54, celebrated his second marriage, to Gayle Killilea, a former gossip columnist 20 years his junior, by inviting 44 of his friends on a two-week Mediterranean wedding cruise on the yacht Christina O, on which Aristotle Onassis and Jacqueline Kennedy married.

Much as the $3 million birthday party for Stephen A. Schwarzman, the Blackstone Group founder, came to be seen as a crass display of private equity’s manifold riches, the Dunne wedding was viewed similarly in Ireland: as a conspicuous and garish expression of the man and his business.

That a billion euro property plan and a gaudy wedding celebration should be held up as cautionary exemplars of Ireland’s pursuit of money angers Mr. Dunne. In his view, it speaks to what some call the Irish disease.

“Jealousy and begrudgery are still alive and well in Ireland, and whoever eradicates them should be prime minister for life,” he says as he tucks into a heaping plate of gravy-drenched turkey and mashed potatoes in the restaurant of one of the two hotels he owns — and is hoping to raze. “It’s part of the Irish psyche and it is the result of 800 years of being controlled by other people, of watching everything the master or landlord is doing.”

Mr. Dunne’s compact paunch, reddish cheeks and mischievous grin — which he occasionally deploys with a wink of his eye — can give him the air of a department store Santa. But his business methods are far from jolly: he is notorious for taking legal action against all who cross him, from local newspapers to rival property developers.

He defends his purchase of the Ballsbridge site as responsible, not reckless, as his critics have deemed it. He points out, too, that his winning bid was just slightly more than the second-highest offer and that subsequent property sales had far exceeded his submission of 54 million euros an acre.

Still, he recognizes that times have changed. Just recently, he pruned staff at his development company, and some of his senior executives agreed to take 50 percent pay cuts.

Asked where he will find the 600 million euros that he needs to tear down the two hotels, dig a massive hole in the ground and erect his vision of a new Dublin, he ruefully remarks: “It is fair to say that there is not a queue of bankers lining up to lend to me right now.”

But he says the project will be completed, assuming that it wins approval of the planning board. “If anyone wants to bet I can’t do this, I will take that bet,” he says, citing, without specifics, talks with Asian banks and a sovereign wealth fund. “You have to have steel in a certain part of your body to do this job, and as one of my bankers recently said to me, ‘Sean, the only thing that will take you out is a stray bullet.’ ”

In many ways, the ups and downs of Mr. Dunne’s life and career mirror the Irish economy’s own rise and fall. Born into a house without electricity or running water in the small provincial town of Tullow, outside Dublin, Mr. Dunne studied construction economics at a technical college in the 1970s.

Along with many of his countrymen, he forsook the stagnant Irish economy — in his case, choosing bartending in New York City and working on an oil rig in Canada.

With the Irish economy still afflicted by an unemployment rate of about 20 percent in the 1980s, and a punitive overall tax rate, he began his real estate career in London. He moved back to Ireland in 1990 and began a string of property deals.

He initially focused on government-sponsored housing projects. But as the Irish economy began its true take-off, demand came from the growing corps of newly wealthy Irish, many of whom were returning to Ireland from abroad. They were joined by a wave of foreign workers.

After years of emigration and economic stagnation, Ireland’s housing stock was depleted, precipitating a housing euphoria. Capital gains taxes were low, as were interest rates. Banks stood ready to lend, offering mortgages with no money down to a house-hungry population.

The projects of Mr. Dunne and a small circle of developers grew in size and scope until the skyline of Dublin, never known for its tall buildings, began to fill with cranes and great shiny towers.

Signs of a bubble were everywhere: a family home in Dublin cost as much as a similar abode in Beverly Hills; house prices more than doubled over a 10-year period; and household debt as a percentage of G.D.P. jumped to 160 percent from 60 percent during the same period.

Irish banks, unlike those in the United States, didn’t dole out that many subprime loans. Rather, they lent furiously to big property developers who themselves were liberated to build pell-mell by government-imposed tax breaks.

Mr. Dunne, who says he put 35 percent cash down — or about 125 million euros — for the Ballsbridge project, says that even with the drop in asset values, he still has hope that the project can be completed.

“This is the way God made me, with heavy shoulders and an ability to carry a great load,” he says, forcefully rejecting the rumors of his financial demise buzzing around Dublin. (One of the more fantastic claims was that his financial troubles had forced him to take a month’s recuperation in a mental institution.)

“Failure is not an option for me,” he says. But others aren’t so sure.

The Irish government recently announced a $7.5 billion bank bailout and took majority stakes in the country’s largest banks, a move that followed the government’s earlier promise to guarantee all bank deposits.

Analysts are uncertain that the government will allow the banks to continue to support the type of high-risk, high-reward projects that have become the bane of their financial existence.

“The banks in Ireland did not lend recklessly to individuals; they lent recklessly to developers,” says Ronan Lyons, an economist at Daft, Ireland’s largest property Web site. As for the Ballsbridge project, he may well take Mr. Dunne’s bet.

“I would be surprised if it gets built,” Mr. Lyons says. “The migrants are going home, there is a surplus of properties for sale, and even though this is a landmark project there is just not an appetite for large projects now.”

While the pain is acute in Dublin, at least the city has the small comfort of having enjoyed the full benefit of the boom.

A site in Limerick, Ireland, where work on a shopping center was halted. The city has been hit hard by the downturn.

Such is not the case in the city of Limerick. Traditionally one of Ireland’s more depressed cities, Limerick was a latecomer to the property party. While there were some good times, the downturn has had a more wrenching effect there, with unemployment over 14 percent — among the highest rates in Ireland.

The layoffs have picked up speed around Limerick in the last month, as construction companies have stopped work, seemingly on a dime, sending such a procession of jobless to seek assistance that the local unemployment office became the second busiest in the country.

The waiting room in the office is dank and gloomy, and Dale McNamara, 20, wonders how a professional life once so charmed came to be so hopeless. Since graduating from high school as an electrician, flourishing building work in the area kept him more than busy and flush enough to buy a new car, start a family and consider buying a house.

Then, without warning on Dec. 5, he was told that it would be his last day of work, just six months before he would have received his certificate as an independent electrician.

Since then, he has been frantically knocking on doors, but to no avail. Now, as rent, heating bills and car payments pile up, he is beginning to feel desperate, unable to afford a night out or a Christmas present for his 20-month-old baby.

“If I don’t get a job in the next two weeks, I am worried about losing my house,” he says. “We have no money.”

He looks at his number in the unemployment lines and grimaces — he has been waiting four hours now and his name has still not been called.

“My grandfather says this reminds him of the 1930s when everyone left for America and Australia,” he adds. “There is just no work here.”

More dire, however, is the condition of the permanently unemployed in Limerick’s festering ghettoes, where experts say the unemployment rate touches 70 percent. During the early years of the economic revival, the government did its best to spread money to such areas, which are a feature of urban life all over Ireland.

In fact, it was through social housing projects like these that Mr. Dunne got his start as a developer. But as the investment returns in the private sector became quite obviously more lucrative, the attention paid to so-called social estates like Moyross, on the northern outskirts of Limerick, wavered.

Crime, gangland disputes and a sense of anomie flourished as Moyross and other similar projects evolved as cocoons of poverty and hopelessness amid the riches and celebration of the Irish miracle.

“This place missed out entirely on the moment,” says Stephen Kinsella, an economist at the University of Limerick. “There has been no accumulation of wealth here.”

Walking through the garbage-strewn, empty roads on a cold, misty afternoon, Mr. Kinsella points to the shuttered houses and the mothers still dressed in pajamas taking their children home from school. Social workers in Moyross refer to the “pajama index”: the more men and women one sees who do not take the time and care to dress for the day, the worse the economic situation tends to be.

The Irish government has recently begun a regeneration project in Moyross that would result in large new investments in housing and infrastructure, but the going so far has been slow.

Brother Shawn O’Connor, a Franciscan monk, works with the poor in Moyross, on the outskirts of Limerick.

For Brother Shawn O’Connor, a Franciscan monk who has been living and working with the poor in Moyross for more than a year now, the vicissitudes of the Irish property market are a notion as distant as is his hometown, Red Hook, a village in the Hudson Valley of New York.

Brother O’Connor is the local superior of the community of Franciscan Friars, who do their work in some of the world’s most destitute communities. He and his fellow monks extend day-care assistance and spiritual counseling to the needy. They survive themselves on four hours of daily prayer and food handouts from neighbors — as Franciscans, they take a vow of chastity, poverty and obedience and thus do not spend money on any personal items, including food.

He recognizes that the deprivation of his community is severe, but suggests that it may be an easier hardship than the experiences of many Irish who have seen their riches disappear.

“There was this one story of a guy who shot his wife, son and daughter,” he says. “He had overextended himself. There is this desperation for wealth and people go after it — only to find out that it is not enough.”

Original Story - New York Times

Update Story - February 7, 2009

Ireland's Boom Falls Hard in Global Crisis

As Overheated Property Market Crumbles, Even Guinness Beer Feels the Pain as Brewery Plans Are Put on Hold

This is how bad Ireland's economic crisis has gotten: Guinness is having second thoughts about putting a new brewery here.

In better times, a taste for the premium-priced malty stout was an emblem of newfound prosperity for emerging countries around the globe. Such was the demand that in May, Diageo PLC, Guinness's parent, said it would spend nearly $1 billion to build a "superbrewery" in a Dublin suburb.

The entrance to the 250-year-old St. James Gate brewery in Dublin, where Guinness beer is made. Parent company Diageo PLC recently put on hold plans to spend nearly $1 billion for a new Guinness plant.

Times have changed. Last month, Diageo, citing the "current difficult global economic situation," put the plans in cold storage.

That could be said for the entire country. Ireland, once the booming Celtic Tiger and envy of Europe, is faltering badly. Like Americans, the Irish put gains from their growing wealth into real estate, borrowing to keep building. When the credit crisis struck, the edifice tumbled down.

The entrance to the 250-year-old St. James Gate brewery in Dublin, where Guinness beer is made. Parent company Diageo PLC recently put on hold plans to spend nearly $1 billion for a new Guinness plant. Brewery Brewery

For years, Ireland seemed to be doing everything right. It opened up to foreign investment, luring high-tech manufacturers with low taxes and a skilled work force.

But the property binge and bust has been its undoing. One bank has been nationalized, and the government is negotiating bailouts for two more. Unemployment is projected to zoom close to 10% this year. The central bank forecasts a 4% slump in gross domestic product. Last week, Prime Minister Brian Cowen pledged massive spending cuts to shave €2 billion ($2.59 billion) from a yawning budget gap.

It wasn't long ago that Ireland was the poor corner of Europe. The great potato famine of the 1840s imposed crushing poverty, and for more than a century an Irishman's best business plan was to leave. But the economic changes of the 1990s brought new wealth and higher salaries. That meant fancier houses.

With the global recession, the cycle has stopped. Salaries are falling. Banks are stuck with bad loans. House prices in some areas have slumped by a third.

"We put all our eggs in one basket," says Senan Griffin, the mayor of County Kildare, 25 kilometers west of Dublin.

Guinness's new superbrewery was an emblem of Ireland's progress, a sign that a foreign corporation -- Guinness is Irish, but Diageo is a U.K. conglomerate -- was willing to pour money into manufacturing.

Mr. Griffin's county was in line to get the superbrewery. Kildare had a good location and a historical connection to make the marketers smile: Arthur Guinness, the eponymous brewer, opened shop in the town of Leixlip, in Kildare, in 1755, before moving to Dublin.

But there was a hitch. Of the €650 million cost for the project, €500 million was to come from shrinking the Dublin brewery and selling excess land. Today, reaping such a sum is unlikely, given the poor appetite for new real-estate developments. Diageo declined to comment.

At the Dublin brewery, called St. James's Gate, few know what to think, other than that the economic situation is bound to worsen. "I think we ain't seen nothing yet," said plant worker Matthew Reville.

Mr. Reville's grandfather was a security man at St. James's Gate. His father made labels in the print shop. Mr. Reville, a union steward, has worked as a bottler, a rigger and a power-station operator, among other jobs.

At first, the superbrewery engendered optimism. St. James's Gate is 250 years old, a hodgepodge of disused buildings ripe for an overhaul. "There's a sense of desolation about this place," Mr. Reville says. The smell of roasting grains fills the air. "That's why people were excited about something state of the art."

Some jobs would be lost, he says, but older workers initially figured they would get cushy severance and pad their income with odd jobs. Now, neither is likely.

The place of Guinness in Ireland has changed, too. With newfound wealth, Irish tastes became more worldly. The awning of The Malt House, within site of St. James's Gate, is Irish green, but it advertises Danish Carlsberg.

At the bar, retired hospital worker Jim Price was working through a pint of Guinness. He shrugs off the notion of Guinness's departure. "Where else would they put it?" he says. "You'll be dead and gone, and it'll still be here."

County Kildare had done well in the boom. Intel Corp. and Hewlett-Packard Co. built plants. Between 1991 and 2006, the population grew 50%, to 186,000.

Today, real-estate prices are down 15% or more in the past year. Intel is sticking with Kildare, though H-P intends to idle its plant for eight days this spring. The superbrewery would have brought in about 250 jobs, figures Mayor Griffin, a former high school principal. "There was fantastic excitement around the county," he says. "Yes, I was disappointed. But I'm confident they are returning."

Six real-estate offices sit on the main drag of Maynooth, one of Kildare's larger towns.

Inside one, 29-year-old Niall McMahon waits for calls. Mr. McMahon was laid off in July after four years from a job with CB Richard Ellis, brokering office space for corporations that were flooding Dublin.

By last spring, he said, "there was nobody coming anymore."

He has cut expenses, to have enough to pay down the loan on his Dublin house. More take-out, fewer restaurants. No trips to Barcelona. In November, he got a job in Maynooth, at a brokerage that had just opened. How's business? "We haven't sold anything," he says.

In a way, Ireland offers a lesson in how not to handle your newfound riches.

Alan Ahearne, an economist at the National University of Ireland in Galway, worked for the U.S. Federal Reserve. When he came back to Ireland in 2005, he was unnerved. House prices had rocketed, outpacing incomes and rents.

In 2006, the census found more than 250,000 empty properties, in a country with a population of just over four million. Many were investments their owners didn't bother renting out, so good were the gains from rising prices. "That, to me, was a scary sign," Mr. Ahearne said.

Ireland's membership in the euro zone brought benefits, but also hazards. Low interest rates brought a flood of credit, which the Irish put to work buying homes.

The period of low rates was "fine for the German economy, which was very weak at the time, but it wasn't for the Irish economy, which was very strong," says Mr. Ahearne. To regain its footing, he says, Ireland will face painful "real devaluation" -- falling wages and prices that bring the living standard down.

Cuts are everywhere. One day late last month, talk turned to slicing the wages of commentators on RTE, the state-owned broadcaster. That proposal hadn't been warmly accepted by commentators on RTE. On his show, radio host Gerry Ryan (salary €558,990 in 2006) bristled, implying the government was out to squelch dissenting opinion.

In a Dublin pub, an occasional painter -- "not full time," he says, "you can't get it now" -- who gave his name as Jimmy was reading the bad news in the paper.

"The past 10 years have been great," he said. "But people got greedy." In the 1970s, he emigrated to England to seek work. He didn't see his six children for 12 years. Tough times are coming again, he says. "We're going to go back to wearing no shoes."

Update Story - Wall Street Journal